Two of the central themes to emerge from the financial reform bill, which President Obama signed into law July 21, are transparency and greater oversight. From the creation of a consumer protection agency tasked with ensuring creditors explain fees in plain English to the first-ever regulatory framework for derivatives, the entirety of the U.S. financial system will feel the reverberations of the overhaul for years to come.

But tucked deep inside the dictionary-sized Dodd-Frank Act, about two pages call out the resource extraction industry--companies involved with obtaining oil, natural gas and minerals--seeking greater transparency in the payments those companies make to the governments in countries where they function.

Between the BP oil spill in the Gulf of Mexico, staunched at press time, and April's deadly coal mine explosion in West Virginia, it's a sector that's come under recent scrutiny for lackadaisical regulatory practices. But the path toward the provision began more than two years ago, well before this year's catastrophic accidents put mineral management front and center.

Introduced in the House in May 2008, the Extractive Industries Transparency Disclosure Act sought information about payments public U.S. companies make to governments in countries where they drill and mine. Shareholders could then use the disclosures to determine how much of a company's operations are tied into its relationship with the host country, as well as how the payments stack up to those for comparable work privileges in other countries. A bipartisan group of senators introduced a similar bill in September 2009.

Supporters of the legislation applaud the provision from both shareholder and human rights perspectives. (Many companies in the sector operate in politically unstable countries, so the disclosures could help citizens hold their governments more accountable for the income.) But skeptics question, why now? Many posit the reporting requirement will add a hefty, undue burden on the sector when there are bigger problems to worry about.

"I cannot see a demonstrated need for this," says Gregg Rosen, a partner at McGuireWoods. "It's going to cause a lot of compliance costs because it's going to require the reporting of every single payment to every country."

Extracting Information

The provision calls for the comprehensive and easily searchable disclosure of payments to governments, both foreign and domestic, within the targeted industries. Every part of the revenue stream for the development of oil, natural gas and mineral operations--from taxes to bonuses to royalties--that's paid to a government must be disclosed annually in an interactive format. It's similar to voluntary disclosures already encouraged by the Extractive Industries Transparency Initiative, a global coalition that promotes improved governance in resource-rich nations. Former British Prime Minister Tony Blair launched the initiative in 2002.

"What this is going to do is highlight for an interested party what countries companies are getting their oil, natural gas or minerals from and who they're paying," says Michael Hermsen, a partner at Mayer Brown. "People can see exposures and how much they're paying for that exposure. It should make it much more transparent so people can figure out how they want to act on it."

Sustainability Analyst Paul Bugala, of Calvert Asset Management Co. Inc., cites recent royalty fluctuation in Venezuela as an example of the kind of risk the disclosures could highlight. In 2004, Venezuela raised its royalty rates for oil companies to 16.67 percent from 1 percent. The move took companies by surprise, Bugula says, and Exxon pulled out. Prior to the increase, Venezuela's royalty rate was well below the international industry average. With more complete knowledge of global royalty rates and their impact on company cash flow, analysts could have easily seen the discrepancy and projected that Venezuela might, at some point, abruptly bring its rates in alignment.

"If shareholders knew the details going into an investment, they could view it with the requisite awareness," Bugala says. While there's always a certain amount of guesswork in extrapolating risk, analysts could at least make more educated guesses about the direction an industry is heading in a particular country.

Social Studies

The legislation is part of a trend toward factoring in the impact of social factors on risk, says Bugala, who authored a paper in support of the Senate bill. He compares it to the Securities and Exchange Commission's (SEC) proposed reporting requirements for climate change risks that consider environmental factors.

"It's about transparency. It's about minimizing risks for investors," he says. "As we push boundaries further into riskier environments, other factors become material." Some companies that are ahead of the curve have already factored this reporting into the cost of doing business and realize the long-term benefits, he says.

But translating these social factors into financial risks may be easier said than done, Rosen says. He suspects the provision is intended to root out illegal payments, something already covered by the Foreign Corrupt Practices Act.

"If the idea is you're going to have a section of an annual report that says 'illegal payments,' fine, but we know that's not going to happen," he says. "If a company is bound and determined to hide an illegal payment, it's not going to be disclosed by this law."

Developing Plans

The requirement targets a broad swath of companies--broader than may be initially obvious. The SEC has 270 days from the time the bill was signed to write its final rule, which will clarify exactly who is targeted. But as the provision appears in the Dodd-Frank Act, Hermsen says it seems to cover anyone who's at all involved in the extractive industries.

Implementing the reporting requirement will likely be a pricy and possibly complicated endeavor, so Hermsen says any companies that think it applies to them should start developing a reporting infrastructure now.

Rosen suggests that because it's a new area of compliance for the sector, the process of developing a plan should be a multidimensional effort that includes the legal department, auditors, accountants and outside counsel. But despite all the best preparations, until the SEC issues its final rule, many questions remain.

"There isn't a mechanism for dealing with the uncertainty in the meantime," Rosen says. "[The sector] is understaffed for legislation that is thrust on it like this. It puts business in a quandary."